IN THE SENATE OF THE UNITED STATES
October 20, 2015
Mr. Rubio introduced the following bill; which was read twice and referred to the Committee on Finance
To provide the legal framework necessary for the growth of innovative private financing options for students to fund postsecondary education, and for other purposes.
This Act may be cited as the
Investing in Student Success Act of 2015.
Authorization of Income Share Agreements
Purpose; lawfulness of instruments; preemption of State law
It is the purpose of this title to authorize individuals to enter into income share agreements for the purposes of obtaining funds for postsecondary education in exchange for agreeing to pay to the holder of the contract a specified percentage of the individual’s future income.
Lawfulness of contracts; preemption
Any income share agreement that complies with the requirements of section 102 shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income.
Terms and conditions of income share agreement contracts
Definition of income share agreement
For purposes of this title, the term income share agreement means an agreement between an individual and any other person under which the individual commits to pay a specified percentage of the individual’s future income, for a specified period of time, in exchange for payments to or on behalf of such individual for postsecondary education, workforce development, or other purposes.
Terms and conditions of agreements
An income share agreement complies with the requirements of this section if the contract complies with each of the following conditions:
Specified percentage of income
The income-share agreement shall specify the percentage of future income that the individual subject to the agreement will be obligated to pay, except that the agreement shall provide for that any year covered by such agreement during which the individual has an income that is less than $15,000 (adjusted each year to reflect changes in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the Department of Labor for the most recent 12-month period for which such data are available) the individual shall not be required to pay for such year any portion of the individual’s income.
Definition of income
An income share agreement shall specify the definition of income to be used for purposes of calculating an individual’s obligation under the contract.
Annual limitation on obligation
The percentage of income required under the income share agreement to be paid by the individual subject to the agreement may not exceed a percentage such that, when multiplied by $15,000, the product exceeds the aggregate amount of periodic payments of principal and interest that would be required to be paid during a 12-month period under a comparable loan that bears interest at a fixed annual rate of 20 percent.
Aggregate limitation on obligation
No eligible individual may enter into any income share agreement if the total percentage of such individual’s future income that the individual agrees to pay under that contract, and any other income share agreements of such individual, exceeds 15 percent of such future income.
Time-based limitation on obligation
The income-share agreement may not provide for the individual subject to the agreement to assume a commitment to pay future income having a commitment factor, that when added to the commitment factors for any other income-share agreements to which such individual is subject, equals a sum that exceeds the maximum commitment factor.
As used in this paragraph, the term commitment factor means, with respect to an income-share agreement, the product of—
the percentage (expressed as a decimal) of such future income required to be paid during such period; and
the remaining number of years under the agreement that future income is required to be paid at such percentage.
Maximum commitment factor
As used in this paragraph, the term maximum commitment factor means, with respect to an income-share agreement, 2.25 (which figure is the product of 7.5 percent and the number of years in the longest allowable contract under paragraph (6)(A)).
Extension of period
The income-share agreement may provide that such period may be extended by a number of years that is equal to the number of years during which the agreement is in force for which the individual’s annual income is below the dollar amount specified in paragraph (1).
The income-share agreement shall specify the terms and conditions by which the individual subject to the agreement may extinguish the individual’s obligations under the agreement before the end of the payment period specified in the agreement and any application extension provided for in the agreement pursuant to paragraph (6)(B).
An income share agreement does not comply with the requirements of this section unless the individual who is committing to pay future income is provided, before entry into such agreement, a disclosure document that clearly and simply discloses—
the agreement is not a debt instrument, and that the amount the individual will be required to pay under the agreement—
may be more or less than the amount provided to the individual; and
will vary in proportion to the individual’s future income;
that the obligations of the individual under the agreement are not dischargeable under bankruptcy law, except in a case that would impose an undue hardship on the debtor and the debtor’s dependents;
whether the obligations of the individual under the agreement may be extinguished by accelerating payments, and, if so, under what terms;
the duration of the individual’s obligations under the agreement (absent such accelerating payments), including any circumstances under which the contract would be extended;
the percentage of income the individual is committing to pay under the agreement and the minimum amount of annual income that, pursuant to subsection (b)(1), triggers the individual’s obligation under the agreement to make payments for such year; and
the definition of income to be used for purposes of calculating the individual’s obligation; and
a comparison of—
the amounts an individual would be required to pay under the income-share agreement at a range of annual income levels, which income levels shall correspond to the levels the individual might reasonably be expected to make given the intended use of the funds provided under the agreement, as determined in accordance with guidance issued by the Secretary of the Treasury; to
the amounts required to be paid under a comparable loan that bears interest at a fixed annual rate of 10 percent.
An income-share agreement represents an obligation by the individual pay the specific percentage of future income, but shall not be construed to give the contract holder any rights over an individual’s actions.
As used in this title:
The term State includes, in addition to the several States of the Union, the Commonwealth of Puerto Rico, the District of Columbia, Guam, American Samoa, the Virgin Islands, the government of the Northern Mariana Islands, and the Trust Territory of the Pacific Islands.
The term State law means any law, decision, rule, regulation, or other action having the effect of a law of any State or any political subdivision of a State, or any agency or instrumentality of a State or political subdivision of a State, except that a law of the United States applicable only to the District of Columbia shall be treated as a State law (rather than a law of the United States).
Preemption of State Law with respect to usury
Income share agreements shall not be subject to State usury laws.
Rulemaking; model disclosure forms
The Secretary of the Treasury, in consultation with such other agency heads as the Secretary considers appropriate, may issue such regulations as may be necessary to carry out this title.
Model disclosure forms
Not later than the end of the 180-day period beginning upon the date of the enactment of this Act, the Secretary of the Treasury, after consultation with such other agency heads as the Secretary considers appropriate, shall promulgate a model disclosure form for the disclosures required under section 102(c).
Any person who uses the model disclosure form promulgated pursuant to paragraph (1) and includes accurate information required under section 102(c) to be disclosed shall be deemed to have satisfied the requirements of section 102(c).
Tax Treatment of Income Share Agreements
Tax treatment of income share agreements
Exclusion from gross income of income share agreement proceeds
Payments made under an income-share agreement that complies with the requirements of section 102 to or on behalf of the individual who commits to pay a specified percentage of such individual’s future income to another person under such agreement, and any difference in value of the payments to or on behalf of such individual and the total amount paid by such individual, shall not be includible in the gross income of such individual for purposes of the Internal Revenue Code of 1986.
Treatment of payments of future income
Payments of future income received by another person under an income share agreement shall be treated for purposes of the Internal Revenue Code of 1986—
first, with respect to so much of such payments as does not exceed the amount of the payments to which subsection (a) applies with respect to such agreement, as a repayment of investment in the contract which reduces the holder’s basis in such agreement, and
second, as income on the contract which is includible in gross income.
Income share agreement
For purposes of this title, the term income share agreement has the meaning given such term under title I.
Qualified education loan
Qualified education loan
Paragraph (1) of section 221(d) of the Internal Revenue Code of 1986 is amended by adding at the end the following:
Such term includes any income share agreement (as defined in section 102 of the Investing in Student Success Act of 2015), except that payments made by the taxpayer during the taxable year to meet an income share agreement obligation shall not be taken into account under subsection (a).
Information reporting not required
Subsection (e) of section 6050S of such Code is amended by inserting
(without regard to the last sentence thereof) after
Federal Individual Assistance Treatment of Income Share Agreements
Amounts received not treated as income in calculation of financial need under the Higher Education Act of 1965
No portion of any amounts received by an individual for entering into an income share agreement (as such term is defined in title I) shall be included as income or assets in the computation of expected family contribution for any program funded in whole or in part under the Higher Education Act of 1965.
Investment Company treatment
Businesses making income share agreements excluded from investment company treatment
Section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)) is amended—
in paragraph (4), by inserting after
industrial banking, the following:
income share agreements (as defined under section 102 of the Investing in Student Success Act of 2015),; and
in paragraph (5), by inserting
, including income share agreements after
services each place such term appears.